Question

1. You are planning to take a spring break trip to Canada your senior year. The trip is exactly two years away, but you want to be prepared and have enough money when the time comes. Explain how you would determine the amount of money you will have to save in order to pay for the trip.

2. Identify the steps involved in computing the present value when you have multiple cash flows.

**I hope for a non-repeated answer so that it is not considered cheating**

Answer 1

Hi,

Answer to Ques 1:-

If you are planning to go to Canada after two years then you must have to plan following:-

1. Firstly you have to plan what amount you will be required on trip i.e. Budgeted Expenditure. For this you have to consider certain expenses such as Hotel Booking cost, Flight Tickets Cost(Both Side), Transportation Cost, Fooding Cost, Visiting New places Charges etc. This Amount should be adjusted of Inflation.
2. After you have calculated Total Amount Required on the trip then you have to calculate Present Value of that amount. It is because after two year, your money value which you have saved will be decreased due to Inflation. So you have to Compute Present Value of the total Budgeted Expenditure.
3. After You have calculated Present Value then you have to plan where to invest and how to invest. The answer for where to invest may be Saving Bank A/c and how to invest may be Lumpsum (Whole Present Value at a time).

Answer to Ques 2:-

Steps in Computing Present Value when you have different cash flows:-

1. Firstly Place all Cash flows Vertically in a Table.
2. Then Calculate Discounting Factor
   • To Calculate Discouting Factor- Formula =
3. Then Multiply Discounting Factor with their respective cash flows to get Present value of all the years
4. At the end sum up all the Individual Present values.

Let's see an Example to clarify in detail:

Example:- Find Present Values of cash flows. Assuming DIscount Rate @ 10%.

Cash Flows:-

Year 1  5000

Year 2 3000

Year 3: 7000

Year	Cash Flows	Discounting Factors	Present Value
1	5000		5000 * 0.909 = 4545
2	3000		3000 * 0.826 = 2478
3	7000		7000 * 0.751 = 5257

Present Value (4545+2478+5257) =   12280

Thanks !